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Amazon.com Fights a War on 2 Fronts

Amazon is faced with deteriorating margins and heightened competition.

Amazon.com(Nasdaq: AMZN) faces competition from fellow online juggernaut Google(Nasdaq: GOOG) in a brand new way. At its annual conference, Google announced a cloud service offering named Google Compute Engine, supposedly a direct competitor to Amazon's Web Services. What consequences will this have for Amazon?

Well, Google is offering the Compute Engine service at around half the price of Amazon's Web services. Amazon already hosts data for thousands of businesses, but the price advantage alone could shake things up for the Internet retail giant.

Besides the cloud-computing department, Google also shook things up with the announcement of its all-new Google Nexus 7 Tablet, which features a 7-inch screen. You might think it's just another cheap budget tablet at its $199 price tag. However, under the hood lies a different story altogether, with NVIDIA's (Nasdaq: NVDA) 1.3 Ghz Tegra 3 processor and an NVIDIA 12-core GeForce Graphics processing unit, something that could definitely give Amazon's Kindle Fire a run for its money.

Margin woesThe one thing that worries me about Amazon is its margin profile, and a look at the company's net income margins reveals the current state of affairs. The company's annual net income margins used to hover above the 3% level in previous years. However, Amazon's trailing-12-month net income margin on March 2012 stood at just 1.1%. The reason lies in heavy costs tied its growing Prime subscriber base and the buildout of its network of massive distribution centers. The deteriorating condition of the company's margins should definitely be a cause of concern for investors, especially if it doesn't begin to reverse course in the near future. As the stock trades at a trailing P/E multiple of 183, investors appear to think margins will reverse course and allow the company to grow into that lofty valuation.

A Foolish conclusionAmazon has a lot of issues to take care of, with one of them being its wafer-thin net income margins. Given the trajectory that the company's performance has taken of late, I'd be extremely careful before putting my money on Amazon. So, what do you think about Amazon's depreciating margins? Let us know by leaving your comments below. You can also add Amazon to your free Watchlist.